Cisco: an example of best practice in mergers and acquisitions

Let's talk about best practice companies and Cisco Systems in particular. There some successful frequent acquirers that one can emulate. The approach of these companies varies depending on the business. In my journal of Change Management Article, I contrast Cisco with GE Capital. Time does not permit a full comparison here. Michael Porter, Harvard strategy guru, suggests that good acquisitions start with a good strategy. Cisco developed a matrix focusing on their market segments. They use this matrix to identify where they have products and where they need them. Cisco tries to build 70 percent of its products internally, but if the company does not have the resources to become a market leader in a targeted segment within six months, it looks to buy its way in. Another significant aspect of Cisco's approach employs Porter's concept, that successful acquisitions rely on sharing activities. Cisco has a knack for identifying startups at a time when they are old enough to have developed and tested a product, yet are privately-held, flexible, and need the leverage and advantages a big company like Cisco can bring. These companies can leverage Cisco's manufacturing, distribution, IT systems and accounting systems, for example. This enables them to more quickly move into the marketplace and reach a larger volume of customers than they could as a start-up. To understand how Cisco creates a win-win relationship, let's look at an August 17th, 2006 announcement, that Cisco Systems has taken an 80 percent stake in Silicon Valley startup, Nuova Systems. Cisco said it committed 50 million to the data center firm and depending on a company's performance could share out additional funding. Nuova Systems will become a majority owned subsidiary of Cisco. The remaining 20 percent of the company will be held by Nuova's employees. Cisco has the option to buy the remaining 20 percent depending on the success of Nuova's products sold through Cisco. The payout for remaining 20 percent stake could be anywhere from 10 million to 578 million. Cisco set an obvious incentive to do well. John Chambers, Cisco's CEO, feel Cisco has created a positive reinforcing cycle. When target companies realize how good Cisco is at acquiring companies and retaining people, it makes it easier to acquire the next organization. Companies come to Cisco, "Acquire us." In fact, these companies are willing to be acquired at a lower price because of Cisco's track record. Cisco is very disciplined in looking at an acquisition and has turned down more companies than it has acquired. It asks these basic questions when considering an acquisition. Are our visions basically the same? Can we produce quick wins for the shareholders? Can we produce long-term wins for all four constituencies, shareholders, customers, employees, and partners? Is the chemistry right? A measure of integration success is the retention of the high price talent acquired in the new company. Cisco during high-tech boom and through 2000, lost a scant 2.1 percent of the employees it had acquired, versus an industry average of 20 percent lost after an acquisition. Cisco has a staff dedicated to integration. Teams stay at the targeted company from the start of the acquisition through deal closing. They tailor their integration process to each transition, they map where each employee will best fit in Cisco. The integration team gets each employee quickly on the appropriate Cisco Systems. The day after the deal closes, a tailor made orientation begins for the acquired company and its employees.